On June 29, 2021, Bill C-208 received Royal Assent. As previously discussed, that Bill amended the federal Income Tax Act (the “Act”) with the intention of facilitating intergenerational business transfers. The amendments sought to accomplish those means by, in general:
- providing that siblings continue to be related for purposes of section 55 of the Act if a share of the corporation paying the subject dividend is a qualified small business corporation share (QSBCS) or share of the capital stock of a family farm or fishing corporation (SFFC), each as defined in subsection 110.6(1) of the Act; and
- deeming, for purposes of section 84.1, a vendor to deal at arm’s length with a purchaser corporation if the transferred shares are QSBCS or SFFC, the purchaser corporation is controlled by one or more children or grandchildren of the vendor who are 18 years of age or older, and the purchaser corporation does not dispose of the subject shares within 60 months after their purchase.
Pursuant to the Interpretation Act (Canada), the amendments enacted by way of Bill C-208 entered into force, and thus became law, as of the date of Royal Assent (i.e., June 29, 2021).
In a surprising news release issued on June 30, 2021 (the day after Bill C-208 received Royal Assent), the Department of Finance stated that while it was committed to facilitating “genuine” intergenerational share transfers, it wished to prevent what it perceived to be tax avoidance that undermines the equity of Canada’s tax system. To that end, Finance noted that Bill C-208 did not include an application date and thus outlined the government’s intention to introduce legislation designed to “clarify” that the amendments in Bill C-208 would apply only as of January 1, 2022. The news release resulted in significant public criticism and prompted the House of Commons Standing Committee on Finance to convene a special hearing on July 20, 2021 focussed solely on the coming in force date of Bill C-208.
Perhaps in response to such public scrutiny, on July 19, 2021 (one day before the House Committee hearing) Finance issued a new press release intended to replace its June 30, 2021 release. In the latest release, Finance acknowledged that the amendments contained in Bill C-208 entered into force on June 29, 2021 and are thus currently part of the Act. However, Finance reiterated the government’s intention to propose amendments to safeguard against “unintended tax avoidance loopholes” that it views as having been created by Bill C-208, while honouring “the spirit of Bill C-208”. The news release outlined four general topics which the amendments would address:
- the requirement to transfer legal and factual control of the corporation carrying on the business from the parent to their child or grandchild;
- the level of ownership in the corporation carrying on the business that the parent can maintain for a reasonable time after the transfer;
- the requirements and timeline for the parent to transition their involvement in the business to the next generation; and
- the level of involvement of the child or grandchild in the business after the transfer.
Presently, the government intends to bring forward draft amendments for consultation on a prospective basis, instead of retroactively (as implied by the June 30, 2021 news release). Such amendments would apply as of the later of November 1, 2021 and the date of publication of the final draft legislation. Until that date, it appears the changes to the Act made by way of Bill C-208 – which contain several technical uncertainties and interpretive issues – are legally valid and in force.
* The authors wish to thank Kyle B. Lamothe for his assistance in editing this blog.